Porter's Value Chain

Another method of diagnosing an organization is to analyze its value chain. The term value chain was introduced by Michael Porter to refer to the activities that are performed within and surrounding the organization that add value to its products or services. Organizations should perform these activities effectively for competitive advantage.

Value chain analysis identifies five primary areas within the value chain, as shown in the figure Porter's Value Chain:

  • inbound logistics
  • operations
  • outbound logistics
  • marketing and sales
  • service

Additionally, four secondary areas are identified as follows:

  • infrastructure
  • human resources management
  • technology development
  • procurement

Porter argued that an organization should seek to provide unique value for its customers by finding what it does best (which will result in competitive success), rather than entering into too many markets, striving to please everyone, or trying to provide the lowest cost. Organizations will be successful when they focus on creating a unique value for the customer, determine who their customer base is, negotiate the best distribution channels, and manage their production and pricing strategies. Organizations will always face challenges from changes in the environment. To remain effective, organizations will need to focus on continual innovation and on increasing their value to the customer.

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The value-added chain is the process by which technology is combined with material and labor inputs, and then processed inputs are assembled, marketed, and distributed. The value chain shows the links, or chain, of the distinct activities and processes that a company performs to create, manufacture, market, sell, and distribute its product or service. The focus is on the activities that create value for customers.

Value-chain activities can be segregated to provide a detailed identification of a company’s activities and the capabilities that correspond to each activity. The value-added chain is best defined in terms of each link's contribution to total cost. By comparing the costs incurred by each link and against competitors, the company can locate the critical success factors that must be addressed.

The importance of value-chain analysis is that it helps portray the costs in a company’s operations that might be impacted by a change in one of the chain's processes. By comparing a company’s value chain to its competitors’, you can identify areas for improvement.

It is important to note that the value chain is influenced by the type of strategy the company and its competitors follow. If the company is a high-value, high-quality market leader, its chain will be different from the low-cost, high-volume competitor. These differences influence value-chain analysis. Companies must make sure that their business strategy is in tune with their strategic objectives.

The airline industry represents a good example of differentiation. Many airlines operate under similar circumstances and share similar cost structures and routes. Methods of differentiation can include lowest-price or on-time record, and areas such as boarding procedures, carry-on policies, airline miles, and social media can drive customer loyalty. The example of Southwest Airlines illustrates how putting people first creates a solid marketing position. It is important to identify the opportunities that increase a product or service's perceived value to the customer (Smartsheet, n.d.).

Another example is the American steel industry, which consists of large, vertically integrated carbon steel makers. Some of the steel companies are integrated from ore mining to finished products. Their profitability has been threatened by mini steel mills and imports. Steel producers must choose either to reduce crude steel production and focus on flat and specialty steel products, or cut costs. The value-added chain is useful in identifying links that are not cost competitive.

For strategies driven by product differentiation, the value-added chain is best defined in terms of the contribution of each link to market value. This method helps identify the product attributes preferred by consumers and links them to the value-added activities in the chain that generate this attribute.

However, assets that underlie the production of these attributes cannot be easily redeployed along the value-added chain. There is also the risk of product or process imitation by competitors. Companies, therefore, often pursue different strategies. Analysis of value chains shows that strategy is not just about the selection of profitable product markets. It is also about investing in the links that generate the product attribute desired by consumers and which correspond to the firm's distinctive competence relative to its competitors.

Depending upon the customer preferences and competitors’ strengths, the company can decide to redeploy its assets, pursue its traditional business, withdraw from the business, or make an acquisition of the critical assets.

The value-chain concept is thus useful in isolating the critical success factors of a strategy. For strategies in competitive industries, the chain isolates those links that are not currently viable relative to competition. For strategies of product differentiation, the chain indicates those links that generate downstream economic rents.

In the global context, the chain of comparative advantage for countries must be explored.


Smartsheet. (n.d.). The art of value chain analysis: From defining activities to identifying areas for improvement. Retrieved from https://www.smartsheet.com/art-value-chain-analysis-defining-activities-identifying-areas-improvement

Porter, M. E. (1985). The competitive advantage: Creating and sustaining superior performance. NY: Free Press.